- A redemption charge is not a load fee
- No load funds may have redemption fees but they are generally smaller
- Load mutual funds may charge a higher redemption fee, and this can affect the earnings and performance of the fund
What impact does a redemption charge have on the performance of load mutual funds? What about no load funds? Is there any difference between the two fund types, redemption charges, and the fund performance? These questions are smart ones to ask, and determining what effect any redemption fees will have on the performance of mutual funds that you choose is one consideration that should be evaluated. Fees incurred to redeem shares in the mutual fund are not load fees, because these expenses are invested back into the fund to cover the costs involved with the transaction. Some investors may only hold shares for days or weeks, and then redeem them to make a fast profit. If there are no charges then these transaction costs will be taken from the fund assets, and this can lower the value of the fund. This means the short term investors walk away with the profits, and the investors in it for the long term end up with lower earnings and higher expenses.
Commission free stock may also have redemption fees, even though the stock trades do not have any associated broker commissions or sales incentives. Some mutual funds may charge a fee that is a back end load fee, and this is a commission and not a true redemption charge, because the fee is going to the broker and not back into the fund. A true redemption fee is invested back into the fund, and does not go to a third party instead. This helps improve the value of the fund, and prevents the fund from performing poorly due to high expenses. A fee charged to redeem your shares in the fund may be charged if you redeem them before the time specified by the fund, which can be anywhere from days to weeks, months, or years, depending on the specific fund. This fee will help the fund perform better, because of the higher asset value and lower fees incurred by all shareholders in the fund.
Carefully determining all of the costs involved in any mutual fund investment is the key to determining which funds will perform better. Even no load funds may have redemption charges, and these are not intended to compensate third parties for bringing in new investors. This fee is instead charged to investors who buy and sell within a short time frame determined by the individual fund. Not all funds have this charge, and some load mutual funds may have higher expenses in other areas which help cover fund turnover transaction costs instead. All of the mutual fund expenses will deduct from your investment capital and returns, and a redemption fee may be just one fee among many. No load funds may or may not charge a redemption fee, but these funds still usually outperform load mutual funds because the overall expenses to the fund and all shareholders is still lower.
Any redemption fee that is charged will affect how the fund performs because it will determine what expenses the fund pays and what expenses the individual shareholder is responsible for. These fees can range from one percent or less for some true no load funds that have these charges up to three or four percent or even more for load mutual funds. This may be in addition to any back end or level load with these funds, and this may cause the fund to perform poorly and your investment to lose value. Look carefully at all aspects and expenses involves with a fund, including any charges to redeem shares within a specific time frame. Funds with the lowest expenses and best performance are the best investments, and these are funds which normally do not charge a load fee.
